Euro Continues To Be Weighed By Confirmation Of Dollar's Reserve Status, Record Drop

DailyFx · June 15, 2009, 7:00am

The Euro was sunk overnight by over 150 pips after Russian Finance minister Alexei Kudrin confirmed that the dollar had no rival as the world reserve at the moment. The comments came in the midst of the G-8 meeting and calmed fears that this week’s BRIC summit would see calls for finding an alternative to the dollar as a store of wealth.

[B]Talking Points
• Japanese Yen: Choppy Above 98.0
• Pound: Fisher Cautions Of Future Challenges
• Euro: Sunk By Russian Fin Min Comments
• US Dollar: Empire Manufacturing On Tap

[/B][U][B]Euro Continues To Be Weighed By Confirmation Of Dollar’s Reserve Status, Record Drop In Employment.[/B][/U]

The Euro was sunk overnight by over 150 pips after Russian Finance minister Alexei Kudrin confirmed that the dollar had no rival as the world reserve at the moment. The comments came in the midst of the G-8 meeting and calmed fears that this week’s BRIC summit would see calls for finding an alternative to the dollar. The summit of global leaders also saw questions raised regarding the European banking system which is also helping weigh on the euro. The unwillingness of governments to provide bank stress test similar to the U.S. has left many wondering if they have enough capital to meet the challenges ahead. Meanwhile, Euro-zone 1Q unemployment fell by 0.8% which was the biggest quarterly drop on record and may add to the single currency’s weakness.

Markets started to hedge their bets that the Euro would be seen as a substitute for the dollar as a reserve currency which helped spur some of the recent greenback weakness. Russia has been the biggest proponent of removing the dollar of its world reserve status and now that it has confirmed its dominance we could see more reversal of flows as we head into the U.S. session. As I said on Friday, “Despite rhetoric from countries such as Russia calling for the end of the dollar as the world reserve, the safety and liquidity of U.S. Treasuries will make it difficult for them to find an adequate substitute at this time. It will take a conscious global effort to achieve this and given the rate that initiatives of that magnitude take, it could be sometime before we see a suitable alternative developed.” Nevertheless, despite the Financial Minister’s comments the country is actively seeking alternatives and should be a longer-term concern for dollar bulls. We have seen the EURUSD break below the 20-Day SMA at 1.3982 which as I warned last week has led to extended gains as it is fulfilling a head & shoulder’s formation. Support lies below at 1.3785 the 38.2% Fibo of 1.2884-1.4340, where a break there could see a test of the 50-Day SMA at 1.3576.

After being caught up in the Euro weakness and reaching an intra-day low of 1.6311, the pound has started to regain its footing. We may continue to see sterling weakness as equity markets are trading lower across the globe and the risk aversion could be a weighing factor throughout the day. There weren’t any fundamental release to influence price action which will leave it at the mercy of the broader themes. However, this won’t be the case for the remainder of the week as CPI, BoE minutes and retail sales line the economic docket. The G-8 meeting showed that policy makers are starting to become concerned with the longer –term effects of the amount of liquidity that is being pumped into financial systems, as they discussed exit strategies to avoid rising inflation. The sterling could find support as the BoE was one of the first to take aggressive steps to infuse markets with needed funds and may lead the charge to undo its effects. However, the Confederation of British Industry said that the central bank may need to print more money in order to ensure a recovery as they see growth flattening after a brief recovery.

The dollar was well bid overnight after the supportive comments from Russian finance minister, but we are starting to see gains become harder to come by in recent activity. Manufacturing in the New York area is expected to have weakened to -4.80 from -4.55 after consecutive months of significant improvement which could add to current risk aversion and dollar support. U.S. Dow futures are lower by triple digits which is a strong sign that we may see equities trade lower which could add to bullish dollar sentiment. Meanwhile, turmoil in Iran has raised geopolitical concerns which could also send traders looking for the safe-haven of the greenback.

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